In this paper we develop and test a very general implication of
competitive contractual arrangements in the labor market. Toward this end
we examine whether the level of unemployment prevailing at the beginning of
the job has lasting effects on wage payments throughout the job. The
intuition behind this test is straightforward. If the labor market
functions as a competitive contracting market, then it is the supply and
demand conditions at the time of negotiating the contract that determine
the wage provisions of the contract. Using data from the Current
Population Survey (CPS) and the Panel Study of Income Dynamics (PSID) we
find that wages strongly depend on the labor market conditions prevailing
at the beginning of one’s job. Moreover, our results indicate that the
value of new employment contracts varies by approximately l0 percent over
the business cycle.